If you're seeking new markets but are reluctant to try lesser-known suburbs, current investment conditions may warrant that you take a second look.
Branching into small, suburban markets can expose developers to a wide array of unknowns, including local rent appreciation and functional differences from large, dense markets, but, industry observers agree, the risks may be fewer than one might think.
“I’m convinced that, even at this point in the cycle, you can go to the suburban categories, the right kind of suburbs, and not add any risk to your investment strategy, but actually also achieve a better yield and save a risk-adjusted return,” said Jay Parsons, vice president of MPF Yieldstar, in the opening section of his panel presentation “The Nation’s Strongest Under the Radar Markets,” held Sept. 19 at the MFE Conference in Las Vegas.
Parsons noted the well-known advantages of building in urban cores. Many cities are providing incentives for new multifamily construction, and investors are willing to put their capital forward for urban projects. The real barrier to entry in these markets, according to Parsons, is the cost of that capital and the time needed to build.
In contrast, the “good” suburbs—the Alpharettas of Georgia and the Planos of Texas, Parsons said—might have restrictive zoning against multifamily properties or strong NIMBY opposition from locals. And fewer multifamily properties can receive building permits in these suburbs, but those that can do so at a lower cost than they might in the urban core.
Aaron Terrazas, senior economist at Zillow, followed Parsons with a stronger focus on local-level activity. Using Zillow’s ZIP code–level rent-appreciation data, Terrazas examined the movement of rent growth in the nation’s strongest metros for the metric. He attributes rent growth in these markets to local factors, such as the status of Sacramento, Calif., as a Bay Area satellite market and Atlanta’s infrastructure and lifestyle investments.
“The reality today is everybody has to do their homework,” Terrazas said. “There's no single national narrative. Things are local, the story’s local, and you have to look at the whole data to understand what’s happening here. You can’t just take a single national line.”
Matthew Vance, panel moderator and economist and director, research and analysis, at CBRE, echoed Terrazas’s distinction between the urban core and nonurban core growth. “I want to redefine 'urban,' ” said Vance. “I think every MSA has a lot of different pockets of urban environments that aren’t the CBD [central business district] but reflect the feel and the density of the CBD.”
To illustrate this point, CBRE has created what it calls the Live-Work-Play Index, which color-codes each census region in the nation by its “urbanicity” on a sliding scale. The paler regions on the Live-Work-Play map represent less-urban areas, while the darkest regions indicate the most urban.
Vance proposes that the Live-Work-Play index could be used in capital deployment and portfolio analyses in combination with local rent-growth data, such as that presented by Terrazas, Vance said. “Being able to think about this at this abstract level allows us to combine this index with asset-level performance data, NOIs, and pricing."
